by David Marcus | Published March 5, 2012 at 12:35 PM
Delaware Chancellor Leo E. Strine Jr. has never been a poker-faced judge or a simplistic one, and in extensive comments from the bench on Friday, March 2, at the end of a four-day trial, he suggested that he was leaning toward allowing Martin Marietta Materials Inc. to continue with its $4.9 billion hostile exchange offer for rival construction materials manufacturer Vulcan Materials Co. The bidder has also launched a proxy fight for five seats on Vulcan's 11-member board. Vulcan will hold its annual meeting in May.

Strine spoke so that the parties could "hear what's rambling through the judge's mind before" they write their post-trial briefs in the case, which are due on March 14, with reply briefs due nine days later. Strine will hold final argument the week of March 26, though he did not schedule the hearing on Friday.

The companies began seriously considering a friendly deal in 2010 and signed two confidentiality agreements to allow them to exchange information toward that end. The so-called confi signed on May 3, 2010, provides that both companies will be bound by its terms for two years. The confi signed two weeks later does not specify a termination date.

Neither contract contains a "standstill provision prohibiting either party from making a public offer, or any agreement by Martin Marietta to limit its holdings of Vulcan's shares," Martin Marietta claimed in a filing with the Court of Chancery on Dec. 12, the day it made its bid.

The Raleigh, N.C.-based company stressed the absence of a standstill at trial. Its lead lawyer, Robert Zimet of Skadden, Arps, Slate, Meagher & Flom LLP in New York, got both Vulcan CEO Donald James and its general counsel, Robert Wason IV, to admit that Birmingham, Ala.-based Vulcan signed confidentiality agreements with two other companies that did include standstills and thus that the lack of one in the contracts with Martin Marietta is significant.

Vulcan's lead lawyer, William Savitt of Wachtell, Lipton, Rosen & Katz, countered in cross-examinations of Martin Marietta CEO C. Howard Nye and CFO Anne Lloyd. Savitt sought to get them to admit that Lloyd extracted confidential information from Vulcan counterpart Daniel Sansone that she and Nye used to estimate the potential synergies that they might be able to achieve by merging the companies. Vulcan contends that Martin Marietta used the information in a way barred by the confidentiality agreement, and that it was so critical that Strine should bar the bidder from proceeding.

The judge seemed disinclined to do that. "Am I supposed to permanently enjoin them from making an exchange offer? How long should they be barred and blocked out?" he asked rhetorically on Friday afternoon at the end of the trial.

"There is a way to ensure that the other party to a dialogue like that does not go forth and make an unsolicited proposal. And it is well-understood and it's called a standstill," he said.

The judge was also skeptical of Vulcan's argument that Martin Marietta violated the confidentiality agreements by disclosing information about the talks in Securities and Exchange Commission filings when it made its bid in December. The agency would eventually have required Martin Marietta to reveal much of that information, Strine said.

The judge also didn't absolve Martin Marietta of all wrongdoing. The bidder clearly signed two confidentiality agreements, and, Strine said, "that's pretty difficult rapids to run, to say that there was no use" of the information gained in talks held under the agreements. "Martin Marietta puts itself in a kind of awkward position," he said.

It also leaves the judge in a quandary. Strine referred twice in his comments to the policy implications of the case. On the one hand, as he said at the beginning of his remarks, he doesn't want to give Vulcan a standstill agreement for which it didnot bargain. On the other, he doesn't want to allow Martin Marietta to violate a contract with impunity.

Still, Strine may be skeptical about the severity of the breach. He suggested in his comments that Martin Marietta estimated that there would be about $200 million in potential synergies before the talks between Lloyd and Sansone and that the figure rose to $300 million thereafter, but the judge refused to fixate on that fact. "I don't think any of them know exactly what synergies they would ultimately get," he said. "There's a certain rough approximation and crudeness that comes to capitalism, and then you get inside and you squeeze and you squeeze."

However he rules, Strine's opinion will be important for lawyers in future deals.

Mark Aiello Vice President and General Manager of RR Donnelley's Venue Virtual Data Room speaks with Ali Akbar, Managing Director of RBC Capital Markets about the oil and gas market in the first installment of Merger Talk. More video